Chapter 21: “Developing and Applying a Pricing Strategy ” Joel R. Evans & Barry Berman Marketing, 10e: Marketing in the 21st Century
To present an overall framework for developing and applying a pricing strategy
To analyze sales-based, profit-based, and status quo-based pricing objectives, and to describe the role of a broad price policy
To examine and apply the alternative approaches to a pricing strategy
To discuss several specific decisions that must be made in implementing a pricing strategy
To show the major ways that prices can be adjusted
A Framework for Developing and Applying a Pricing Strategy Consumers Costs Government Channel Members Competition Feedback Objectives Broad Price Policy Pricing Strategy Implementation of Pricing Strategy Price Adjustments Factors Affecting Price Decisions
Developing a pricing strategy is a continuous marketing process and is undertaken when:
A new product is introduced.
An existing product is revised.
The competitive environment changes.
A product moves through its life cycle.
A competitor initiates a price change.
Costs rise or fall dramatically.
The firm’s prices come under government scrutiny.
Indications of Poor Performance with a Pricing Strategy
Prices are changed too frequently.
Pricing policy is difficult to explain to customers.
Channel members complain that profit margins are inadequate.
Decisions are made without adequate marketing research.
Too many different price options are available.
Too much sales personnel time is spent in bargaining.
Prices are inconsistent with the target market.
A high percentage of goods is marked down or discounted late in the selling season to clear out surplus inventory.
Too high a proportion of customers is price sensitive and attracted by competitors’ discounts. Demand is elastic.
The firm has problems conforming with pricing legislation.
Return on investment
Early recovery of cash
Favorable business climate
Possible Pricing Objectives
This approach aims toward the mass market to gain high sales volume.
Goals are volume and market share.
This strategy is aimed at the segment interested in quality, uniqueness, and/or status.
Goals are profit maximization, return on investment, and early recovery of cash.
Alternative Ways of Developing a Pricing Strategy Cost-Based Pricing Compare selling price with competitors Begin with costs and work towards selling price Begin with selling price and work to costs Demand-Based Pricing Competition-Based Pricing Cost Factors Demand Factors Pricing Strategy Competitive Factors Combination Pricing Above the Market Below the Market At the Market
A firm sets prices by computing merchandise, service, and overhead costs and adding an amount to cover its profit goal.
It is easy to derive.
The price floor is the lowest acceptable price a firm can charge and attain profit.
Goals may be stated in terms of ROI.
PRICE FLOOR +Profit goals (Merchandise, service, and overhead costs) R O I
Cost-Based Pricing Techniques
Seeks specified rate of return at standard volume of production
Determines lowest price at which to offer additional units for sale
Cost-Based Pricing Techniques
Traditional Break-Even Analysis
Determines sales quantity needed to break even at a given price
Pre-determined profit added to costs
Computes percentage markup needed to cover selling costs & profit
Cost-Plus Pricing Price = Total fixed costs + Total variable costs + Projected profit Units produced Prices are set by adding a pre-determined profit to costs. It is the simplest form of cost-based pricing .
Markup Pricing A firm sets prices by computing the per-unit costs of producing (buying) goods and/or services and then determining the markup percentages needed to cover selling costs and profit. It is most commonly used by wholesalers and retailers. Price = Product cost (100 – Markup percent)/100 Some firms use a variable markup policy , whereby separate categories of goods and services receive different percentage markups.
Traditional Break-Even Analysis Total fixed costs Price - Variable costs (per unit) Break-even point (units) Break-even point (sales dollars) = These formulas are derived from the equation: Price X Quantity = Total fixed costs + (Variable costs per unit X Quantity) = Total fixed costs Price - Variable costs (per unit) Price
Break-Even Analysis Can Be Adjusted to Take into Account the Profit Sought Total fixed costs + Projected Profit Price - Variable costs (per unit) Break-even point (units) Break-even point (sales dollars) = = Total fixed costs + Projected Profit Price - Variable costs (per unit) Price
Demand-Based Pricing Techniques
Modified Break-Even Analysis
Combines traditional break-even analysis with demand evaluation
Sets two or more prices to appeal to distinct market segments
Demand-Based Pricing Techniques
Extends demand-minus pricing back through the channel
Works backward from selling price to costs
A firm sets prices after studying consumer desires and finding a range of prices acceptable to target market.
It begins with selling price and works backward to cost variables.
It identifies a price ceiling or maximum customer will pay for a good or service.
Demand-Minus and Chain-Markup Pricing
In demand-minus pricing , a firm finds the proper selling price and works backward to compute costs. It is used by firms selling directly to consumers.
It has three steps:
Price is determined by surveys or other research.
The required markup percentage is set based on selling expenses and desired profits.
The maximum acceptable per-unit cost for making or buying a product is computed.
Chain-markup pricing extends demand-minus calculations all the way from resellers back to suppliers. Final selling price is determined and the maximum acceptable costs to each channel member are computed.
With price discrimination , a firm sets two or more prices for a product. Higher prices are for inelastic shoppers and lower prices for elastic ones.
Customer-based price discrimination — Prices differ by customer category for the same good or service.
Product-based price discrimination — A firm markets a number of features, styles, qualities, brands, or sizes of a product and sets a different price for each product version.
Time-based price discrimination — A firm varies prices by day versus evening, time of day, or season.
Place-based price discrimination — Prices differ by seat location, floor location, or geographic location.
When a firm uses price discrimination, it may apply yield management pricing to determine the mix of price-quantity combinations generating the most revenues for a given time.
In competition-based pricing , a firm uses competitors’ prices rather than demand or cost considerations as its primary pricing guideposts.
With price leadership , one firm announces price changes and others follow.
With competitive bidding , two or more firms submit prices to a customer for specific goods or services, for organizations such as government or nonprofits .
Setting a Competition-Based Price Firm’s Price? Above Market Selling Price At the Market Selling Price Below the Market Selling Price
Implementing Pricing Strategies (1)
How does a firm make decisions and determine goals and strategies based on the VALUE preferences of customers?
Price-quality association Odd pricing One price/Flexible pricing Customary/Variable pricing
Price Bundling for a Bookcase A consumer can buy a bookcase and have it delivered, assembled, and stained for $489, or buy the bookcase for $379 and do all or or some of the other functions. The total for unbundled price is $529 . Bundled Pricing Bookcase—$489 Includes delivery, assembly, staining Unbundled Pricing Bookcase —$379 Delivery — $50 Assembly — $35 Staining — $65
The chapter presents an overall framework for developing and applying a pricing strategy.
It analyzes sales-based, profit-based, and status quo-based pricing objectives, and describes the role of a broad price policy.
It examines and applies the alternative approaches to a pricing strategy.
It discusses several specific decisions that must be made in implementing a pricing strategy.
It shows the major ways that prices can be adjusted.